The storm before the calm

As we face summer and the weather warms, markets seem poised for thunderstorms. Near-term inflation data remains elevated; Federal Reserve rate hikes are priced in; a flood of supply is coming, driven by several mammoth IPOs; we have quarter-end rebalancing of institutional portfolios (which have drifted with the rally to above-target equity weightings); there is ongoing, volatile news flow about the Strait of Hormuz; and fiscal policy is uncertain as the midterm election cycle comes into focus — and all overlaid with a new, and therefore less predictable, Fed Chair in Kevin Warsh.

Against this backdrop, some kind of pullback — perhaps even a significant one — could be in order. However, we remain focused on the unusual fundamental factors driving this secular bull, many of which are accelerating rather than deteriorating. Given this, we do not think we are smart enough to time a pullback; in our experience, the odds of getting back in at a better price are not great. So, we are sticking with one of the key lessons we’ve learned over the last many years: In Secular Bulls, you buy dips, you don’t sell rallies.

Let’s run through the list of reasons the market might have a pullback, and why we would be buying any dip if it did:

1. Near-term inflation data remains elevated, though it will begin to roll over by next year. Recent inflation readings remain firm, with headline inflation running at 4.2% — significantly above last year’s levels. However, much of this reflects energy price dynamics, with oil stabilizing just below recent highs. Core measures remain considerably more contained. Looking ahead, base effects alone should begin to moderate year-over-year comparisons beginning early next year. Moreover, any easing in geopolitical tensions could drive sharp disinflationary prints on a month-over-month basis, accelerating that process. Bottom line: The inflation spike appears cyclical and externally driven, not structural.
2. Fed rate hikes have already been priced in and yet are very unlikely to happen under the new, forward-looking Fed Chair. Rate expectations have shifted meaningfully, with the market now pricing the potential for a rate hike by the end of the year. Importantly, the Fed — under new leadership — is likely to place greater emphasis on forward-looking indicators rather than reacting mechanically to lagging data. That framework reduces the risk of policy over-tightening in response to temporary inflation pressures, particularly those tied to energy markets. With underlying components such as shelter inflation trending lower, the broader inflation backdrop supports policy flexibility over time.
3. A flood of supply is coming but the gap between equity returns and their public market alternatives (cash and fixed income) remains large and should continue to expand. High-profile equity issuance — including mega-cap IPOs — has raised concerns about incremental supply. While individual deals may appear large, they remain small relative to the scale of global capital markets. For example, SpaceX launched the biggest IPO in history. The $75 billion offering and $1.5 trillion price tag seem enormous but they pale in comparison to the entire market cap of the US, currently valued near $75 trillion. Add in global equities of $55 trillion and a fixed-income market estimated at nearly $150 trillion, and these large offerings are merely drops in the bucket.
4. Quarter-end rebalancing could be coming, though might be offset partially by shifts out of private markets. Equity markets have had a historic second quarter, with the S&P 500 rallying as much as 16% at one point, while fixed income markets have been relatively flat. That means that an institutional investor who rebalances on a calendar basis could find themselves several percentage points overweight equities relative to their neutral targets, creating the potential for some quarter-end rebalancing volatility. But in the past, concerns about institutional rebalancing have proven at best temporary and never enough to spark an extensive pullback.
5. Iran conflict news flow remains volatile, but the endgame less so. The incentive to arrive at a resolution, including a fully opened Strait of Hormuz, remain overwhelming. The on-again, off-again conflict flareups, including renewed threats of a Kharg Island takeover, and back and forth rumors of an impending “deal” continue to stress global markets. In the meantime, global participants are proving more flexible than experts predicted, with a notable downward adjustment to Chinese oil demand (partly attributable to its heavy investment in alternative and nuclear energy and ongoing coal capacity), an increase in US production at a pace of more than one million barrels per day, greater flows through existing pipelines that avoid the Strait, and a better success rate of covertly escorting ships past the Iranian attempts at a blockade than has been previously publicized.
6. The midterm election cycle creates policy uncertainty but is unlikely to shift the supply-side driven policies that are fueling the present growth backdrop. Midterm election years often bring heightened volatility, especially during the summer months. However, the market’s baseline expectation of policy gridlock tends to limit the probability of major legislative shifts. Meanwhile, structural economic drivers, including supply-side initiatives and private-sector investment from the One Big Beautiful Bill remain largely independent of near-term political dynamics. Political uncertainty may create volatility, but it is unlikely to change the economic trajectory.
7. Fed Chair Warsh introduces some uncertainty around future Fed policy, but the tools and approach he will bring to the Fed are better known than in most previous transitions. New Fed leadership introduces a degree of uncertainty, and markets often test that transition. That said, institutional continuity, committee-based decision-making and established policy tools suggest that any shift will be gradual rather than abrupt. Markets have a history of testing a new Fed Chair, but Warsh’s focus on forward-looking monetary policy should win out in the long run, especially as his approach has been well flagged.

When we add all of this up, our conclusion is that, while a pullback could easily happen at any time in the next several weeks, timing and sizing it will be difficult. Everyone already knows, and is perhaps positioned for, all of the risks outlined above. In addition, most investors understand that the fundamentals of this Secular Bull will be unaffected by these near-term factors: an acceleration in economic growth due to the AI revolution, the supply-side reforms and tax policies of the Trump administration, and an explosion in economic productivity driving unprecedented margin expansion among US companies. With earnings growth powering ahead, and $450 in earnings on the S&P in our sights for 2028, it seems inevitable to us that, whatever the near-term volatility, longer-term investors are likely to do very well in stocks over the next three years. We have expressed this view in our balanced models, with a 60% of max overweight to stocks, balanced across growth, value, small caps and emerging markets. Should a correction come, we would welcome, and buy, it.

Buy the dips, don’t sell the rallies.